India inks revised tax treaty with Singapore to check round-tripping

Under the new treaty with Singapore, India will tax investments at 50% of the capital gain tax between 1 April 2017 and 31 March 2019


Finance Minster Arun Jaitley. Photo: PTI
Finance Minster Arun Jaitley. Photo: PTI

New Delhi: India on Friday signed a revised double tax avoidance agreement (DTAA) with Singapore to tax capital gains on investments from the city-state starting 1 April 2017.

Due to provisions in the previous treaty, India was not able to tax investments routed through Singapore.

India has already revised similar tax agreements with Mauritius and Cyprus, the two other top sources of foreign direct investments into the country.

“This year on May 10 we had amended DTAA with Mauritius. Then in September we amended with Cyprus and today we amended the DTAA with Singapore. With these three, we have successfully stopped round-tripping through this route,” finance minister Arun Jaitley said briefing reporters.

Round-tripping refers to the phenomenon of Indian money flowing out of the country and returning in the garb of foreign capital to take advantage of tax breaks.

The renegotiated tax treaties are part of an effort by the National Democratic Alliance (NDA) government to curb treaty abuse, tax evasion and round-tripping of funds.

Under the new treaty with Singapore, India will tax investments at 50% of the capital gain tax between 1 April 2017 and 31 March 2019. From financial year 2019-20 onwards, India will be able to tax such investments at its full domestic tax rate. However, the capital gain tax will be applicable prospectively and investments till 31 March, 2017 will be protected.

The protocol signed on Friday also inserts provisions to facilitate relieving of economic double taxation in transfer pricing cases. Transfer pricing is the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.

Abhishek Goenka, partner, direct tax, PwC India, said the renegotiation of the Tax Treaty with Singapore marks the culmination of a long process of renegotiation of the three key treaties that India had which provided exemptions from capital gains tax.

“The final outcome as regards the Singapore Treaty is not a surprise and most investors were expecting that it would mirror the new Mauritius Treaty, which is what it is as far as capital gains is concerned,” he added.

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